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Sun, 11 May 2014 11:55:56 +0100Sun, 11 May 2014 11:55:56 +0100The changing dynamics of US inflation persistence: a quantile regression approachhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34722
We examine both the degree and the structural stability of inflation persistence at different quantiles of the conditional inflation distribution. Previous research focused exclusively on persistence at the conditional mean of the inflation rate. As economic theory provides reasons for inflation persistence to differ across conditional quantiles, this is a potentially severe constraint. Conventional studies of inflation persistence cannot identify changes in persistence at selected quantiles that leave persistence at the median of the distribution unchanged. Based on post-war US data we indeed find robust evidence for a structural break in persistence at all quantiles of the inflation process in the early 1980s. While prior to the 1980s inflation was not mean reverting, quantile autoregression based unit root tests suggest that since the end of the Volcker disinflation the unit root can be rejected at every quantile of the conditional inflation distribution.Peter Tillmann; Maik Hendrik Woltersworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34722Wed, 05 Nov 2014 11:55:56 +0100Fiscal consolidation strategyhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34721
In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact. We consider two types of dynamic stochastic general equilibrium models: a neoclassical growth model and more complicated models with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the initial model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run.John F. Cogan; John B. Taylor; Volker Wieland; Maik Hendrik Woltersreporthttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34721Wed, 22 Oct 2014 12:55:23 +0200Evaluating point and density forecasts of DSGE models : [Version 23 Januar 2012]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34398
This paper investigates the accuracy of point and density forecasts of four DSGE models for inflation, output growth and the federal funds rate. Model parameters are estimated and forecasts are derived successively from historical U.S. data vintages synchronized with the Fed’s Greenbook projections. Point forecasts of some models are of similar accuracy as the forecasts of nonstructural large dataset methods. Despite their common underlying New Keynesian modeling philosophy, forecasts of different DSGE models turn out to be quite distinct. Weighted forecasts are more precise than forecasts from individual models. The accuracy of a simple average of DSGE model forecasts is comparable to Greenbook projections for medium term horizons. Comparing density forecasts of DSGE models with the actual distribution of observations shows that the models overestimate uncertainty around point forecasts.Maik Hendrik Woltersreporthttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34398Tue, 29 Jul 2014 14:39:17 +0200Evaluating point and density forecasts of DSGE models : [Version 4 September 2012]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34712
This paper investigates the accuracy of forecasts from four DSGE models for inflation, output growth and the federal funds rate using a real-time dataset synchronized with the Fed’s Greenbook projections. Conditioning the model forecasts on the Greenbook nowcasts leads to forecasts that are as accurate as the Greenbook projections for output growth and the federal funds rate. Only for inflation the model forecasts are dominated by the Greenbook projections. A comparison with forecasts from Bayesian VARs shows that the economic structure of the DSGE models which is useful for the interpretation of forecasts does not lower the accuracy of forecasts. Combining forecasts of several DSGE models increases precision in comparison to individual model forecasts. Comparing density forecasts with the actual distribution of observations shows that DSGE models overestimate uncertainty around point forecasts.Maik Hendrik Woltersworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/34712Tue, 29 Jul 2014 14:16:57 +0200Fiscal consolidation strategy: An update for the budget reform proposal of march 2013 http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/29714
Recently, we evaluated a fiscal consolidation strategy for the United States that would bring the government budget into balance by gradually reducing government spending relative to GDP to the ratio that prevailed prior to the crisis (Cogan et al, JEDC 2013). Specifically, we published an analysis of the macroeconomic consequences of the 2013 Budget Resolution that was passed by the U.S. House of Representatives in March 2012. In this note, we provide an update of our research that evaluates this year’s budget reform proposal that is to be discussed and voted on in the House of Representative in March 2013. Contrary to the views voiced by critics of fiscal consolidation, we show that such a reduction in government purchases and transfer payments can increase GDP immediately and permanently relative to a policy without spending restraint. Our research makes use of a modern structural model of the economy that incorporates the long-standing essential features of economics: opportunity costs, efficiency, foresight and incentives. GDP rises because households take into account that spending restraint helps avoid future increases in tax rates. Lower taxes imply less distorted incentives for work, investment and production relative to a scenario without fiscal consolidation and lead to higher growth.John F. Cogan; John B. Taylor; Volker Wieland; Maik Hendrik Woltersworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/29714Wed, 17 Apr 2013 13:26:26 +0200Forecasting and policy makinghttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/26875
Volker Wieland; Maik Hendrik Woltersworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/26875Wed, 07 Nov 2012 17:12:25 +0100Fiscal consolidation strategy : [Version 21 September 2012]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/26874
In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact focussing primarily on a dynamic stochastic general equilibrium model with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. We explore the role of the mix of expenditure cuts and tax reductions as well as gradualism in achieving this policy outcome. Finally, we conduct sensitivity studies regarding the type of model used and its parameterization.John F. Cogan; John B. Taylor; Volker Wieland; Maik Hendrik Woltersworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/26874Wed, 07 Nov 2012 17:06:53 +0100The changing dynamics of US inflation persistence: a quantile regression approach : [Version 4 September 2012]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/26873
We examine both the degree and the structural stability of inflation persis tence at different quantiles of the conditional inflation distribution. Previous research focused exclusively on persistence at the conditional mean of the inflation rate. Economic theory, however, provides various reasons -for example downward wage rigidities or menu costs- to expect higher inflation persistence at the upper than at the lower tail of the conditional inflation distribution.
Based on post-war US data we indeed find slower mean reversion in response to positive than to negative shocks. We find robust evidence for a structural break in persistence at all quantiles of the inflation process in the early 1980s. Inflation persistence has decreased and become more homogeneous across quantiles. Persistence at the conditional mean became more informative about the degree of persistence across the entire conditional inflation distribution. While prior to the 1980s inflation was not mean reverting in response to large positive shocks, our evidence strongly suggests that since the end of the Volcker disinflation the unit root can be rejected at every quantile including the upper tail of the conditional inflation distribution.Peter Tillmann; Maik Hendrik Woltersworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/26873Wed, 07 Nov 2012 17:04:59 +0100Evaluating point and density forecasts of DSGE models : [Version 13 März 2012]http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/26872
This paper investigates the accuracy of point and density forecasts of four DSGE models for inflation, output growth and the federal funds rate. Model parameters are estimated and forecasts are derived successively from historical U.S. data vintages synchronized with the Fed’s Greenbook projections. Point forecasts of some models are of similar accuracy as the forecasts of nonstructural large dataset methods. Despite their common underlying New Keynesian modeling philosophy, forecasts of different DSGE models turn out to be quite distinct. Weighted forecasts are more precise than forecasts from individual models. The accuracy of a simple average of DSGE model forecasts is comparable to Greenbook projections for medium term horizons. Comparing density forecasts of DSGE models with the actual distribution of observations shows that the models overestimate uncertainty around point forecasts.Maik Hendrik Woltersworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/26872Wed, 07 Nov 2012 17:01:50 +0100A new comparative approach to macroeconomic modeling and policy analysishttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/24084
In the aftermath of the global financial crisis, the state of macroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings. This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models’ implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development.Volker Wieland; Tobias J. Cwik; Gernot J. Müller; Sebastian Schmidt; Maik Hendrik Woltersworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/24084Tue, 03 Apr 2012 16:08:46 +0200A new comparative approach to macroeconomic modeling and policy analysishttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/24080
In the aftermath of the global financial crisis, the state of macroeconomicmodeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings. This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models’ implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model developmentVolker Wieland; Tobias Cwik; Gernot J. Müller; Sebastian Schmidt; Maik Hendrik Woltersworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/24080Tue, 03 Apr 2012 14:53:50 +0200Essays on business cycle models, forecasting and monetary policyhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/19886
This dissertation introduces in chapter 1 a new comparative approach to model-based research and policy analysis by constructing an archive of business cycle models. It includes many well-known models used in academia and at policy institutions. A computational platform is created that allows straightforward comparisons of models’ implications for monetary and fiscal stabilization policies. Chapter 2 applies business cycle models to forecasting. Several New Keynesian models are estimated on historical U.S. data vintages and forecasts are computed for the five most recent recessions. The extent of forecast heterogeneity for models and professional forecasts is analysed. Chapter 3 extends the forecasting analysis to a long sample and to the evaluation of density forecasts. Weighted forecasts are computed using a variety of weighting schemes. The accuracy of forecasts is evaluated and compared to professional forecasts and forecasts from nonstructural time series methods. Chapter 4 adds a new feature to existing business cycle models. Specifically, a medium-scale New Keynesian model is constructed that allows for strategic complementarities in price-setting. The role of trade integration for monetary policy transmission is explored. A new dimension of the exchange rate channel is highlighted by which monetary policy directly impacts domestic inflation. Chapter 5 tests whether simple symmetric monetary policy rules used in most business cycle models are a sufficient description of reality. I use quantile regressions to estimate policy parameters and find asymmetric reactions to inflation, the output gap and past interest rates.Maik Hendrik Woltersdoctoralthesishttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/19886Fri, 08 Oct 2010 11:01:08 +0200The diversity of forecasts from macroeconomic models of the U.S. economyhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/7902
This paper investigates the accuracy and heterogeneity of output growth and inflation forecasts during the current and the four preceding NBER-dated U.S. recessions. We generate forecasts from six different models of the U.S. economy and compare them to professional forecasts from the Federal Reserve’s Greenbook and the Survey of Professional Forecasters (SPF). The model parameters and model forecasts are derived from historical data vintages so as to ensure comparability to historical forecasts by professionals. The mean model forecast comes surprisingly close to the mean SPF and Greenbook forecasts in terms of accuracy even though the models only make use of a small number of data series. Model forecasts compare particularly well to professional forecasts at a horizon of three to four quarters and during recoveries. The extent of forecast heterogeneity is similar for model and professional forecasts but varies substantially over time. Thus, forecast heterogeneity constitutes a potentially important source of economic fluctuations. While the particular reasons for diversity in professional forecasts are not observable, the diversity in model forecasts can be traced to different modeling assumptions, information sets and parameter estimates. JEL Classification: C53, D84, E31, E32, E37 Keywords: Forecasting, Business Cycles, Heterogeneous Beliefs, Forecast Distribution, Model Uncertainty, Bayesian EstimationVolker Wieland; Maik Hendrik Woltersworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/7902Thu, 19 Aug 2010 16:16:18 +0200Does trade integration alter monetary policy transmission?http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/5829
This paper explores the role of trade integration—or openness—for monetary policy transmission in a medium-scale New Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation. Although the strength of this effect increases with economic openness, it also requires that import prices respond to exchange rate changes. In this case domestic producers find it optimal to adjust their prices to exchange rate changes which alter the domestic currency price of their foreign competitors. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on U.S. time series relative to an aggregate of industrialized countries. While we find evidence for strong complementarities, exchange rate pass-through is limited. Openness has therefore little bearing on monetary transmission in the estimated model.Tobias J. Cwik; Gernot J. Müller; Maik Hendrik Woltersworkingpaperhttp://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/5829Wed, 24 Sep 2008 13:30:34 +0200